Research Briefing Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Bill
- Bill Summary - Summary of Stage 2 changes
National Assembly for Wales Research Service The National Assembly for Wales is the democratically elected body that represents the interests of Wales and its people, makes laws for Wales, agrees Welsh taxes and holds the Welsh Government to account.
Author: Christian Tipples Date: March 2017 Paper Number: 17-002 Front Cover: Photo from flickr by Images Money, licensed under Creative Commons.
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Contents
Introduction ...... 1 Background to the Bill ...... 1 Devolution of tax powers ...... 1 Tax Collection and Management (Wales) Act 2016 (TCMA) ...... 2 Land Transaction Tax and Anti-Avoidance of Devolved Taxes (Wales) Bill ...... 2 Landfill Disposals Tax (Wales) Bill ...... 3 Welsh Government consultation and decisions ...... 3 Bill Summary ...... 5 Part 1: Overview of Act ...... 5 Part 2: The Tax and Key Concepts ...... 5 Part 3: Calculation of Tax and Reliefs ...... 5 Part 4: Leases ...... 6 Part 5: Application of Act and TCMA to Certain Persons and Bodies ...... 6 Part 6: Returns and Payments ...... 6 Part 7: General Anti-Avoidance Rule ...... 6 Part 8: Interpretation and Final Provisions ...... 6 Schedules ...... 6 Costs and impacts of the bill ...... 7 Costs ...... 7 Savings ...... 7 Response to the bill ...... 8 Anticipated implementation timetable ...... 11 Summary of Stage 2 changes ...... 11 Background ...... 11 Amendments agreed at Stage 2 ...... 12 Next steps ...... 13 Further information ...... 13
Introduction
Date of introduction: 12 September 2016 Member in charge: Mark Drakeford AM, Cabinet Secretary for Finance and Local Government Assembly Committee responsible for Stage 1 scrutiny: Finance Committee Stage 1 reporting deadline: 22 December 2016 The Land Transaction and Anti-avoidance of Devolved Taxes (Wales) Bill (‘the Bill’) was laid before the Assembly on 12 September 2016. The Bill was introduced in plenary by Mark Drakeford, the Cabinet Secretary for Finance and Local Government, on 13 September 2016.
The Bill is the first tax specific legislation to be introduced in the Assembly. It establishes provisions for Land Transaction Tax (LTT) in Wales, which will replace UK Stamp Duty Land Tax (SDLT) in April 2018. The Bill is the second in the series of three bills relating to the devolution of tax powers to Wales as stated in the Wales Act 2014.
The Bill follows the Tax Collection and Management Act (Wales) 2016, which received Royal Assent on 25 April 2016. The Act provided the legal framework for the future collection and management of devolved taxes in Wales and established the Welsh Revenue Authority (WRA), the body responsible for collecting and managing devolved taxes.
The Landfill Disposals Tax (Wales) Bill was the third bill introduced in the Assembly on 28 November 2016. This Bill is intended to make provisions for a new tax to replace UK Landfill Tax in Wales. Background to the Bill
Devolution of tax powers The devolution of tax powers to Wales was recommended by the Silk Commission in its report Empowerment and Responsibility: Financial Powers to Strengthen Wales. The Commission recommended the following taxes should be devolved to Wales:
Stamp Duty Land Tax
Landfill tax
Income tax (partial devolution) The Wales Act 2014 made provisions for devolving new tax powers to Wales. It provided the structure within which the Welsh Government can legislate in respect of areas to which Stamp Duty Land Tax (SDLT) and Landfill Tax (LfT) currently apply, which the UK Government intends to devolve to Wales on 1 April 2018.
The Wales Bill: Financial Empowerment and Accountability Command Paper published by the UK Government, setting out details on the implementation and operation of the Assembly’s new tax and borrowing powers, further mentions the devolution of the aggregates levy to Wales, which is currently subject to the resolution of legal challenges in the European court.
In its 2015 Autumn Statement and Spending Review, the UK Government also announced it would repeal the need for a referendum to partially devolve income tax to Wales, which is included in the 1 Wales Bill currently being scrutinised in both Houses at Westminster. This will represent the largest source of tax revenue to be controlled by the Welsh Government.
The intention is to ‘switch off’ UK SDLT from April 2018, which will be replaced by LTT in Wales. The command paper suggested that devolution of tax powers to Wales would increase the financial accountability of the Welsh Government by making it accountable for raising more of the money it spends as recommended by the Silk Commission in its report.
The Office for Budget Responsibility (OBR) published its devolved tax forecast for Wales in November 2016 for both SDLT and LfT of £240 million and £27 million respectively in 2018-19. This is when both taxes are intended be devolved to Wales. Table 1 shows forecasts for LTT up to 2022:
Table 1: LTT tax forecast from 2016-17 to 2021-2022
£ million 2016-17 2017-18 2018-19 2019-20 2020-2021 2021-2022 Residential 118 139 154 172 194 220 Non-Residential 80 81 86 89 95 99 Total Forecast 198 221 240 261 289 319
Source: OBR, Devolved Taxes Forecast, November 2016
The OBR forecast expects LTT to increase by 80% between 2016-17 and 2021-22. Table 1 illustrates that LTT revenue for residential properties will continue to grow faster than non-residential tax revenue year-on-year. Tax Collection and Management (Wales) Act 2016 (TCMA) The Tax Collection and Management Wales Act 2016 received Royal Assent on 25 April 2016. The purpose of this Act is to put in place the legal framework necessary for the future collection and management of devolved taxes in Wales. In particular, the Act provides for the establishment of the Welsh Revenue Authority (WRA) as a non- ministerial department, whose main function will be the collection and management of devolved taxes. Land Transaction Tax and Anti-Avoidance of Devolved Taxes (Wales) Bill The Land Transaction Tax and Anti-Avoidance of Devolved taxes (Wales) Bill was introduced in the Assembly on 12 September 2016. Prior to this a draft version of the LTT Bill was published on 13 July 2016 allowing stakeholders the opportunity to scrutinise the Bill before it was officially introduced.
The LTT Bill sets out the transactions incurring a LTT charge and those liable to pay LTT; procedures for specifying tax rates and bands and the calculation of LTT and reliefs available; provisions for making a LTT return and payment of the tax; duties on taxpayers to pay the relevant tax, penalties and interest; and measures to tackle tax avoidance in Wales.
On 1 July 2016, the Cabinet Secretary announced that the WRA would undertake all collection and management functions for LTT with HMRC providing expertise and knowledge through loans and secondments to develop and enhance the WRA’s LTT compliance expertise.
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Landfill Disposals Tax (Wales) Bill The Landfill Disposals Tax Bill is concerned with establishing the legal, administrative and operational framework for the tax in Wales. Landfill Tax is currently a UK tax on the disposal of material as waste by way of landfill at landfill sites which are permitted under environmental legislation. The current tax was introduced in 1996 as a key environmental behaviour change driver in encouraging the diversion of waste from landfill, greater recycling, reuse and recovery of waste. Welsh Government consultation and decisions Tax devolution in Wales – Land Transaction Tax
In February 2015, the Welsh Government published its Tax Devolution in Wales – Land Transaction Tax consultation, which sought views on the format of a new Welsh tax to replace UK SDLT from April 2018.
This consultation was the second in a series of consultations aimed at developing devolved tax arrangements in Wales. In preparation for the devolution of taxes, the Welsh Government issued a consultation on the collection and management arrangements in September 2014.
The consultation received 38 responses in total with respondents from Wales, the Wales branch of UK-wide organisations or UK-wide organisations with experience of operating existing tax arrangements in Wales. The Welsh Government published a summary of responses in September 2015.
The former Minister for Finance and Government Business outlined the principles for Welsh taxes in the consultation document:
To develop taxes that are fair to the businesses and individuals who pay them; which are simple, with clear rules, aiming to minimise compliance and administration costs; that support growth and jobs, and in turn will help tackle poverty; and which provide stability and certainty for taxpayers.
The consultation expanded on the UK Government reforming SDLT from a slab to marginal rate system for residential property transactions, which the Welsh Government believed would provide a fairer system with less distortion than the former residential slab system. However, at the time, non- residential property transactions were still charged under the slab system, which was changed to a marginal rate system by the UK Government in March 2016.
The consultation focused on a range of areas:
Residential and non-residential property transactions
Partnerships, trusts and companies
Leases
Reliefs and exemptions
Compliance, avoidance, disputes and penalties. The Welsh Government explored a number of issues relating to LTT, including:
Whether current SDLT rates and bands are suitable for Wales
3 The key impacts of Wales having a different tax regime on the residential and non-residential markets
The ability to change or introduce new rates and bands with immediate effect
The definition of residential property in SDLT The importance of consistency between tax regimes
Whether SDLT reliefs or exemptions should be retained , removed or modified or new reliefs introduced for LTT purposes
The requirements for online filing of returns
The need for a pre-clearance facility for LTT The ability to implement penalties for late returns similar to those imposed by HMRC Improvements to the appeal process and tax avoidance rules.
The Explanatory Memorandum stated:
A clear message from the LTT consultation responses was that consistency with SDLT, wherever appropriate, is highly desirable for taxpayers, agents, and business.
The Welsh Government commented that the Bill is strongly aligned to stakeholder responses from the consultation.
Land Transaction Tax: Setting rates and bands
The Welsh Government provided a discussion paper on setting rates and bands for LTT. The paper considers who is affected by changes in taxation of land and buildings transactions and explains how such changes can affect prices, the number of transactions and households and businesses; looks at the current structure of SDLT in greater detail; provides an overview of land and buildings transaction tax (LBTT), the replacement to SDLT in Scotland; and the key factors which need to be considered before developing the rates and bands of LTT for Wales.
The paper stressed
Land transaction tax broadly replicates stamp duty land tax. There will be no changes for change’s sake–where there are differences, these ensure land transaction tax is simpler, efficient and fair for taxpayers.
It is the intention of the Welsh Government to set the LTT rates and bands closer to when the tax comes into effect in April 2018 so it can better reflect the economic conditions at that time. In terms of announcing the tax rates and bands, the paper suggested that Scotland provides a useful and important comparator for Wales as the Scottish Government introduced Land and Buildings Transaction Tax (LBTT) in 2015.
Land Transaction Tax: Higher Rates for Purchases of Additional Residential Properties
In its 2015 Autumn Statement the UK Government announced the introduction of a higher rate for purchases of additional residential properties, which would apply from 1 April 2016. Consequently, the Welsh Government published a consultation in July 2016 to seek stakeholder views on the potential approach to implementing higher rates for LTT purposes.
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The Welsh Government stated that if the higher rates on purchases of additional residential properties are not implemented as part of LTT then this would represent a potential loss of significant resources for investment in Wales:
The Office for Budget Responsibility’s (OBR) most recent forecast from the Budget March 2016 estimated revenues from the new SDLT higher rates for additional residential properties in Wales could be around £14m in 2016-17, rising to £18m by 2020-21.
The consultation focused on:
The types of accommodation and individuals higher rates should apply to Approach to multiple purchases of additional residential properties Additional guidance and potential changes to better suit the Welsh context The potential policy impacts of higher rates The ability for Welsh Government to change tax rates on additional property purchases.
On 14 October 2016, the Cabinet Secretary confirmed that a higher rate of tax for additional residential properties will continue to be levied in Wales when SDLT is devolved in April 2018. Bill Summary
The Bill is divided into 8 Parts containing 80 sections and 22 Schedules: Part 1: Overview of Act Overview of the Bill, which describes the contents of the Parts that follow, but contains no provision intended to have legal effect. Part 2: The Tax and Key Concepts Key concepts, including definitions, providing that LTT will apply to transactions involving property (to include land and buildings) situated in Wales; the type of transactions which are to be regarded as land transactions and which interests are to be regarded or not regarded as chargeable interests or exempt interests for the purposes of the Bill and who will be liable to pay LTT and comply with notification requirements.
For the purposes of LTT, a land transaction is the acquisition of a “chargeable interest”. A chargeable interest is any estate, interest, right or power over land in Wales or the benefit of an obligation or any restriction that affects such an estate, interest, right or power over land in Wales. LTT may not be charged on so much of a Welsh land transaction as relates to land below mean low water mark. Chargeable interests do not include exempt interests.
Where a chargeable interest involves land partly in Wales and partly in England, the transaction is treated as two separate transactions, one relating to Wales and one to England. The payment or other consideration for the transaction will be apportioned. LTT will be charged on the Welsh land transaction and SDLT on the remainder. Part 3: Calculation of Tax and Reliefs The method of calculating LTT will be on the basis of a marginal rate calculation – tax is charged at progressively higher rates on different parts of the consideration. This mirrors the current method of calculating SDLT. The Bill also introduces a framework for setting LTT requiring the Welsh Ministers to 5 set at least three bands of which one must be a zero rate band and requires the rates to be progressive in nature. The rates and bands are not set out on the face of the Bill but will be set by regulations made by the Welsh Ministers closer to the implementation date.
The first regulations setting rates and bands of LTT will be subject to the affirmative procedure; the second and subsequent regulations will be subject to a procedure referred to as a ‘provisional affirmative’ procedure. This will enable the Welsh Ministers to make regulations having temporary effect as soon as they are made with a view to ensuring that changes do not create distortionary activity in the market.
If the regulations are not approved by the Assembly within 28 days they will cease to have effect and any tax paid at a higher rate during the period during which the regulations have had temporary effect may be refunded i.e. the tax payers will not be prejudiced provided they claim the relevant relief.
Part 3 also introduces a suite of Reliefs which are set out on the face of the Bill in Schedules 8 to 21. The Schedules provide for the transactions that should be relieved from the payment of LTT and when such reliefs should apply. The Bill includes a ‘Targeted Anti-avoidance Rule’ aimed at preventing the claiming of a relief where the main purpose, or one of the main purposes of the claim, is the obtaining of a tax advantage. Part 4: Leases This Part together with Schedule 5 provides how LTT applies to the granting, varying, assigning or surrendering of leases. Part 5: Application of Act and TCMA to Certain Persons and Bodies Specifies how the LTT and TCMA applies to companies, unit trusts, open-ended investment companies, trusts, partnerships and other joint buyers and persons acting in representative capacity. Part 6: Returns and Payments Contains provisions relating to tax returns and payments. The WRA will be responsible for specifying the form and content of returns. Where LTT is payable it must be paid to the WRA. The provisions of the TCMA relating to enquiries, determinations or assessment will apply in relation to LTT. So too will the penalty regime established under the TCMA, as well as the provisions relating to interest, recovery of overpayments, reviews and appeals. Part 7: General Anti-Avoidance Rule Addresses tax avoidance and sets out, by way of amendment of the TCMA, a General Anti-avoidance Rule (“GAAR”). The GAAR will apply to all devolved taxes. It is designed to provide the WRA with a mechanism to challenge any attempt to exploit Welsh tax legislation where the purpose is to gain an unfair tax advantage by means of an artificial tax arrangement. Part 8: Interpretation and Final Provisions Contains interpretation and final provisions. Schedules The 22 Schedules to the Bill provide procedural rules for the application of the various reliefs which will affect the way the LTT applicable to a particular transaction is calculated. The fact that a transaction may be relieved from a charge to LTT does not take it outside the scope of LTT; the rules regarding notification apply to relieved transactions. This contrasts with an exempt transaction which will be outside the scope of the Bill and does not need to be notified to the WRA. 6
Costs and impacts of the bill
The Regulatory Impact Assessment (RIA) included in